Designed to Prevent Fraud, 'Arms-Length' Policies Also Pinch Struggling Homeowners

Last year, after being foreclosed on but before being evicted, Daud Sharif and his family thought they might have had a way to stay in their Andover, Mass., home.

A nonprofit civic-development group called Boston Community Capital offered to buy the home from Freddie Mac for $265,000—about 35% below the original mortgage—and sell it back to Mr. Sharif at a price that was higher than what Boston Community paid but lower than the price...